Economy First cut: Growth inflation mix worsens: inflation up, industry down

Economy First cut: Growth inflation mix worsens: inflation up, industry down

Consumer price inflation (CPI) edged up for the fifth straight month, to 5.6% in December, from 5.4% in November. But the rise was much slower than in the previous months as the low base effect wore out. Pulses inflation stabilised at a higher level after rising sharply for nearly a year. This month, higher inflation was driven by a near 40 bps jump in food inflation (mainly sugar, meat, fish and vegetables) and higher fuel inflation (led by the hike in excise duty last month). While the push from a low base will wear out this month, the impact of sharp increases in food prices on overall inflation, will be key monitorable in the coming months. We expect CPI to average 5.4% in fiscal 2016. The RBI has set itself an inflation target of 6% by January 2016, which looks attainable. We therefore believe the RBI will keep policy rates unchanged for the rest of this fiscal unless inflation surprises on the downside. 

In fiscal 2017, we believe, CPI will moderate further to 5.2%. This is under the assumption of further fall in food inflation on the back of normal monsoons, whereas pressures on non-food inflation (excluding fuel) under check.

Industrial production growth slid to -3.2% in November after recording a high of 9.8% in the previous month. This was led by a broad based fall in all sub-categories, the most in manufacturing (-4.4%). In addition, capital goods were the major drag on industrial activity while it was a relief to see consumer durables holding the ground. The slowdown in activity in November was accentuated due to the floods witnessed in Chennai, which is an important center for industrial activity in India. That being, cumulative IIP this year continues to be higher in comparison to last fiscal (at 3.9% versus 2.5% last year) signalling the industrial output will inch up in the current fiscal.

Next fiscal, assuming a normal monsoon, we expect the uptick in the rural economy to provide the necessary impetus to consumption. The lagged impact of interest rate reductions will also start to filter through in the first half of fiscal 2017. Crude prices are expected to remain low and we expect pay commission pay outs, low inflation and easy monetary conditions to support demand. All these factors will in turn raise capacity utilisation which is the key challenge faced by most industrial sectors and is crucial for the pickup in the private capex cycle. We expect GDP to rise to 8.1% in FY17 from 7.4% in FY16 and industry GDP to grow at 7%.